Precious Metal Markets Could Hit a Major Bottom in June
In an interesting analysis posted on May 14, Jordan Roy-Byrne, a Chartered Market Technician, member of the Market Technicians Association forecasts a major bottom in precious metals, possibly occurring this month and even this week. Aside from a thorough technical analysis, Mr. Roy-Byrne also notes some strong fundamentals, which support these expectations. Careful examination of the current state of the different precious metals markets and of their behavior in the past (most notably for the period from late 2008 to early 2009) suggests that the anticipated bottom this month would be followed by a higher low in July or August.
According to Mr. Byrne, bottoms just like tops, take time to develop and reaching a bottom is a long process. He gives examples with the period of late 2008 – early 2009, when commodities hit their price low in December, but the process had already begun in October and wasn’t complete until May. Emerging markets saw a similar movement. Byrne believes that there are clear indications of such processes developing now.
The analyst reminds that each bottom in gold (except in 2008) has come during a period of low and declining volatility. The daily chart of gold for May 11 shows that volatility is at a 9-month low and that only 7% of the traders are bullish. In addition, the Commitment of Traders report shows that the commercial short position has reached a 3-year low and open interest recently touched a two and a half year low.
Meanwhile, silver closed at $28.93, which gives the market a little room to fall before testing $27 and the 600-day moving average. Despite its recent rise open interest for silver would have to rise more than 40% to reach its old high.!m(/uploads/story/13/thumbs/precious_metals_inline.png)
Mining equities and gold stocks are also showing signs of developing a bottom. The indications are especially strong about the latter, with The McClellan Summation index nearing levels last seen at bottoms in 2006 and 2008. The 200-day moving averages are even more convincing, since the stocks in the sector haven’t closed above their averages for more than a month, and that hasn’t happened since 2008.
But if the technical analysis gives indications about a possible bottom occurring in precious metals, there are also some strong fundamentals that also support that thesis. Mr. Byrne points out the trend of weakening data in the US, which might force Fed action. In Europe, Germany has given some indications that it might budge a bit in its position against monetisation, given that Europe is at the brink of recession and steps towards monetisation have to be taken in order to prevent debt contagion and economic contagion. The two biggest emerging markets in the world – China and India have also taken actions, which may cause the fall of precious metals markets. China has cut the reserve ratio of its banks and recently, India (along with Australia) cut interest rates.
The analysis concludes that there is a good chance of precious markets hitting bottom this week or by the end of the month. The bottoming process is long and bottoms don’t appear out of nowhere. Mr. Byrne believes that such process is developing right now.
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